Executives on both sides of the $43-billion WarnerMedia-Discovery merger again confirmed the deal is on track to close by the middle of next year but details otherwise remain scarce on the combination that will reshape the media industry.
In presentations at a media conference yesterday and today, Discovery CFO Gunnar Wiedenfels and AT&T CFO Pascal Desroches said they don’t expect regulatory roadblocks to the transaction. The telecom giant agreed in May to spin off WarnerMedia, which will combine with Discovery to create a behemoth run by Discovery CEO David Zaslav.
Among an army of other assets, the deal joins HBO Max and Discovery+. Wall Streeters and industry players are eager to know how the streaming services will be rolled out and priced. “We have our go-to-market strategy essentially ready,” Wiedenfels said.
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“We’ve got our ducks aligned here [but] obviously, as you know, we’re not in a position to speak about that right now,” he added in response to questions by Jessica Reif Ehrlich, an analyst for Bank of America Merrill Lynch.
Discovery is “starting to set up our integration management office,” he said. “There’s only so much you can do in terms of really detailed work for closing the deal, as you would imagine, but I am very pleased with how the team has been set up.” The strategy then as now “will be aligned around what the customer want.” He confirmed initial cost synergies of about $3 billion.
Zaslav will likely be pressed on the issues again at another media conference next week hosted by Goldman Sachs.
AT&T chief financial officer Desroches, the former CFO of WarnerMedia, said AT&T “couldn’t be more pleased with how the process is going” to unload the entertainment business it acquired in 2018 for $85 billion.
“We are exactly where we thought we would be at this stage of the process, and we expect the transaction to close in the first half of 2022. So we’re really pleased with how that’s moving along,” Desroches said “Here is the reality. When you look at the rules around antitrust, there is no reason why this merger should not be approved — especially given the changes in competitive landscape and the participation by big tech companies in media. When you look at the traditional rules of antitrust, we feel really good about the ability of this to be approved.”
Analyst Dave Barden prodded him gently: “There’s a lot that people don’t know yet about the transaction.”
It’s complicated. “The Reverse Morris trust structure that you’ve created could be done as a dividend, could be done as an exchange offer, a blend of the two. We don’t know what’s going to be done with the $43 billion you’re getting in cash as a function of the divestiture. When will we know?”
Desroches said the decision on structure will be made nearer to the separation. “All options are on the table, and we feel really good about using all those options to optimize value for shareholders.” As for the $43 billion, one purpose of the the deal is to pay down debt and deleverage the company’s balance sheet.
AT&T caused an uproar among its investors when it announced plans to slash its historically reliable dividend after the spinoff. “The retail investment community that owns AT&T, that owns the majority of AT&T, is pretty disappointed about this. What can you do to sell this idea that [you’re] creating value by doing a split?” Barden asked.
Desroches said the lower payout is “candidly, better than all of our peers and better than most companies.” And he said AT&T stockholders could see upside in a WarnerMedia spinoff since they could end up with shares in the new entity. “That’s “an opportunity [for shareholders] to achieve growth through continuing to hold Warner Bros.-Discovery stock, Desroches said. “An opportunity here to achieve… really nice growth in value through appreciation of new media assets.”
AT&T without WarnerMedia and without DirecTV, “looks like an old fashioned telecommunications company,” Barden said. So his clients have been asking him how telco will generate the $20 billion in cash flow it’s promised.
Desroches said lower debt will result in at least $2 billion in annual interest savings. He cited residual cash from the DirecTV deal, unloading content spend for HBO Max (about $4 billion), and it’s own mid-single digital growth in EBITDA.
“When you take all those piece, you should get to how we get to $20 billion.”
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